Sustainable Profits: 6 Dividend Champions with Encouraging DuPont Breakdowns

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Includes: DOV, IRET, ITW, NDSN, PH, SWK
by: Kapitall

If you are considering a stock as a source of dividend income, it is important to remember that dividends are not a guarantee of continued future payments – thus an analysis of dividend sustainability is important.

There are several ways to assess this. One way is to look at the historical dividend trends of the company. Another way is to analyze the profitability of the company, which funds their dividend payments to shareholders.

With these considerations in mind, we performed a DuPont analysis of the sources of profitability for dividend champions, i.e. companies with a history of increasing dividends for at least the past 25 years.

From this analysis, we found 6 companies that passed all requirements for positive results.


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We broke the ROE equation into three parts:

ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

All of the stocks mentioned below have seen rising ROE values for the recent quarter, year-over-year. Then we wanted to analyze the sources of these returns, so we narrowed down the original universe to only focus on companies with the following characteristics:

  • Decreasing leverage, i.e. decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e. declining Sales/Assets ratio) and improving net profit margin (i.e. declining Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

What do you look for in an income investment? Use this list as a starting-off point for you own analysis.

1. Stanley Black & Decker, Inc. (NYSE:SWK): Machine Tools & Accessories Industry. Market cap of $12.09B. Dividend yield at 2.27%. Return on Equity increased from -1.67% to 2.16%. When analyzing the sources of return, Net Profit Margin increased from -8.61% to 6.67%. Sales/Assets increased from 0.0862 to 0.1511, while Assets/Equity decreased from 2.2468 to 2.1485 (comparing 3 mo. ending 4/3/10 vs. 3 mo. ending 4/2/11).

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2. Investors Real Estate Trust (NASDAQ:IRET):
REIT. Market cap of $744.56M. Dividend yield at 7.38%. Return on Equity increased from 0.11% to 2.81%. When analyzing the sources of return, Net Profit Margin increased from 0.78% to 19.65%. Sales/Assets increased from 0.0338 to 0.0374, while Assets/Equity decreased from 4.1626 to 3.8310 (comparing 3 mo. ending 1/31/10 vs. 3 mo. ending 1/31/11). The stock has gained 15.24% over the last year.

3. Illinois Tool Works Inc. (NYSE:ITW): Diversified Machinery Industry. Market cap of $28.80B. Dividend yield at 2.35%. Return on Equity increased from 3.82% to 6.01%. When analyzing the sources of return, Net Profit Margin increased from 8.93% to 14.20%. Sales/Assets increased from 0.2356 to 0.2487, while Assets/Equity decreased from 1.8168 to 1.7017 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 19.22% over the last year.

4. Parker Hannifin Corporation (NYSE:PH): Industrial Equipment & Components Industry. Market cap of $14.57B. Dividend yield at 1.64%. Return on Equity increased from 3.34% to 5.10%. When analyzing the sources of return, Net Profit Margin increased from 5.88% to 8.63%. Sales/Assets increased from 0.2652 to 0.2848, while Assets/Equity decreased from 2.1386 to 2.0753 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 35.86% over the last year.

5. Nordson Corporation (NASDAQ:NDSN): Diversified Machinery Industry. Market cap of $3.60B. Dividend yield at 0.80%. Return on Equity increased from 6.96% to 8.46%. When analyzing the sources of return, Net Profit Margin increased from 12.12% to 16.94%. Sales/Assets increased from 0.2461 to 0.2717, while Assets/Equity decreased from 2.3338 to 1.8377 (comparing 13 weeks ending 1/31/10 vs. 13 weeks ending 1/31/11).

6. Dover Corp. (NYSE:DOV): Diversified Machinery Industry. Market cap of $12.16B. Dividend yield at 1.69%. Return on Equity increased from 2.67% to 4.11%. When analyzing the sources of return, Net Profit Margin increased from 6.83% to 9.95%. Sales/Assets increased from 0.1972 to 0.2093, while Assets/Equity decreased from 1.9787 to 1.9730 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 28.98% over the last year.

*Accounting data sourced from Google Finance, dividend yield and all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.